President Obama plans to tax your retirement.
That was the subject of an email I received this morning. Only it wasn’t quite on target. You see, while it’s true that President Obama’s budget proposal, which is to be released on April 10, has included a proposal aimed at retirement accounts, he’s not targeting my retirement account. Or likely yours (unless you’re reading, Misters Buffett and Romney). The plan, as explained to date, isn’t a direct tax either: the proposal would cap individual retirement accounts of high-end taxpayers at $3 million.
In terms of contributions, for most taxpayers in 2013, the maximum you can contribute to all of your traditional and Roth individual retirement accounts (IRAs) is the smaller of $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year. The rules are a bit different for SIMPLE (savings incentive match for employees) and SEP (simplified employee pension) IRAs, typically used by small business owners; since these are more or less 401(k) or pension equivalents, contributions rates are higher and can be as high as $17,000 for SIMPLE IRAs and up to $51,000 per year for a SEP IRA in 2013.
Since we all agree that encouraging savings is a good thing (!), why would the President consider such a measure? In a word: revenue. As the law is currently written, taxpayers can contribute money to a traditional IRA in today’s dollars. Money inside the IRA grows tax-deferred until it’s withdrawn voluntarily (beginning at age 59-1/2) or it’s time to make mandatory withdrawals (at age 70-1/2). Money that’s growing tax-deferred isn’t circulating. It’s not being taxed and it’s not being used. Putting a cap on the amount that can be socked away and deferred means that the money could still be put aside for retirement, just not in a tax-favored account.
The details on the cap still aren’t clear. Questions remain about how the plan will be implemented since, among other obstacles, IRA owners are not currently required to disclose the values of their IRAs before they reach retirement age. Additionally, the plan so far appears to be targeted to traditional IRAs; it’s not known whether the White House will extend the proposal to include tax-favored Roth IRAs or certain other benefit plans. That’s why the figure that’s being touted – $9 billion for the government over the ten years – as revenue raised under the plan feels like it’s been pulled out of a hat.
Of course, the chance of the proposal getting through unscathed is pretty slim. This is “Joe the Plumber” all over again for the President. Taxpayers generally hate the idea of government control of private savings, including retirement, (agreed) even though realistically, this kind of cap won’t affect the large majority of taxpayers. While two-thirds of workers (66%) have saved money for retirement (according to the 2013 Retirement Confidence Survey (RCS) which downloads as a pdf), the remaining third have no savings. Of those who do save, the average retirement account for those taxpayers 55-64 is $120,000 – nowhere near $3 million.
So why take the chance? The middle-class votes. The President is hoping to appeal to those same voters who were shocked to learn that presidential hopeful Mitt Romney had a tax-deferred IRA that held, at one point, over $100 million. Romney never explained how he managed to put away that kind of money with the existing contribution limits. Speculation has run rampant from allegations (though unproven) of abuse to notions that he invested in Bain Capital assets that he knew would increase dramatically in value. However it happened, that kind of dollars hit a chord with taxpayers – and President Obama is clearly hoping for that same sentiment when it comes to voting on the budget proposal.
It’s an interesting strategy. President Obama’s “tax the rich” plan, or as the White House likes to couch it as “paying your fair share” (even though we can’t agree on what “fair” means), has so far played well to taxpayers but it hasn’t garnered much support in Congress. That may be changing. The White House is enjoying a new level of confidence when it comes to touting its revenue agenda, however, since the latest tax deal which surprised many (including me). My guess is that this latest push won’t be approved as contemplated and is really just a chip in a higher stakes revenue match-up. Compromise, anyone?
